Reverse termination fees: there is more to “market” than the percentage

When negotiating a reverse termination fee (RTF) in an M&A transaction, the conversation often starts with a familiar question: What percentage is “market”? It’s a useful question, but it should not be the first. A reverse termination fee is ultimately a tool for allocating the risks of a transaction failing to close. And not all closing risks, or RTFs, are created equal. Rather than focusing on percentages, buyers and sellers should focus on the underlying closing risks and remedies that the RTF is designed to address.

What you need to know

• Start with the risk, not the percentage. An RTF prices a specific risk that could prevent the deal from closing. Identify that risk before you benchmark. Market data is important but isn’t the whole picture.
• “Market” varies widely. RTFs run from a median of about 3.8% in US public deals to an average of 6.5% in sponsor take-privates (as a percentage of equity value).
• Negotiate the whole package. The fee, efforts covenants, specific performance, exclusive-remedy terms, and any RTF insurance work together. A misalignment could increase a party’s exposure beyond what the party intended to negotiate for.
• Draft the trigger carefully. Clear drafting is a key component in ensuring that an RTF is enforceable.

Buyer beware

At its simplest, a reverse termination fee is a contractual provision in an M&A acquisition agreement under which the buyer agrees to pay the seller a fixed amount if the transaction fails to close in specified circumstances attributable to the buyer. It is called “reverse” because it mirrors the more familiar target termination fee or break fee, which the seller pays the buyer if the seller walks away—typically to accept a superior proposal based on a fiduciary duty to its shareholders. The target fee protects the buyer against the seller’s decision to pursue another deal, while the RTF protects the seller’s deal certainty against buyer-side failure to close.

RTFs are most often proposed where the seller needs more assurance that the buyer can and will close. For example, reverse termination fees may be found

• in transactions carrying meaningful competition, foreign-investment, or other regulatory risk, particularly where the buyer is best positioned to manage that risk;
• in leveraged deals where there is no financing condition, but financing execution risk remains;
• in transactions requiring material and/or multiple regulatory approvals; or
• in competitive processes where the seller is comparing bids not only on price, but also on certainty of closing or large sponsor-backed acquisitions, where the buyer may be a thinly capitalized acquisition vehicle and the seller may not have full recourse if the deal fails¹.

In each case, the fee is a way to put a price on a buyer-specific risk—it’s not simply an add-on to the purchase price.

An RTF should not automatically become the seller’s sole remedy. If specific performance is genuinely available and commercially valuable, the seller may care more about forcing the deal to close than collecting a fee. A fully creditworthy buyer may be expected to bear full damages exposure, especially where the seller already has uncapped remedies, specific-performance rights, and parent or sponsor guarantees. Sellers also commonly resist an exclusive RTF remedy for fraud or intentional breach, and a fee that is too low can function as a price-certain walk-away option for the buyer². In some regulatory situations, conduct covenants—including hell-or-high-water or divestiture obligations—may address the risk more directly than a fee.

RTFs are also not universally common. While RTFs are more likely to appear in public transactions³, RTFs only appeared in 27% of private M&A transactions⁴. Smaller private transactions are even more unlikely to have an RTF, as other remedies are often sufficient to address the relevant risks.

These distinctions are why the percentage should come later in the conversation. First, determine what risk the fee is pricing and what remedies sit alongside it.

What are we actually pricing?

The prominence of RTFs has increased as a solution to financing risk in private equity transactions. A seller might agree to enter into a transaction without a financing condition, while the sponsor’s liability for a financing failure would be limited to an agreed RTF. But the construct has evolved well beyond financing. RTFs are now used to address regulatory risk, buyer shareholder approvals, and other buyer-specific closing risks. In some transactions, the RTF is principally a risk-allocation mechanism. In others, it effectively operates as a cap on the buyer’s liability and an alternative to specific performance or damages.

This distinction matters. Before negotiating the number, the parties should first ask: what event triggers the fee, who controls or is best positioned to mitigate that risk, and what other remedies does the seller have if the transaction fails?

What’s “market”?

The statistics provide a useful reference point, but they also demonstrate why there is no single answer.

A 2024 ABA study of Canadian public-target transactions found an average RTF of approximately 4.76% of transaction value among transactions containing an RTF⁵.

US data varies considerably depending on the population and denominator. Houlihan Lokey’s 2025 study of public-company transactions reported a mean RTF of 3.8% and median of 3.7% as a percentage of transaction value and a mean of 4.1% and median of 3.7% as a percentage of enterprise value, with a range extending from 0.1% to 20.2% of transaction value and enterprise value⁶.

Sponsor-backed take-private transactions tend to be different again. Recent US studies put mean RTFs in sponsor take-privates at approximately 6.5% of target equity value and 4.3% of enterprise value (lower than in 2024 of 7.1% and 5.1%, respectively, reflecting a trend towards sponsor-favourable risk allocation)⁷.

These percentages are useful, but they are not interchangeable. A financing RTF in a sponsor-backed acquisition, a regulatory RTF in a strategic transaction, and an RTF that constitutes the seller’s exclusive remedy are solving different problems.

The better question, therefore, is not simply about market percentage, but rather which market is in question, and what risk the RTF is intended to address.

Two identical deal values. Very different risks.

Consider two $1 billion acquisitions.

The first is expected to close in 45 days, with relatively straightforward regulatory approvals.

The second may remain outstanding for a year while the buyer seeks uncertain competition and foreign investment approvals, potentially requiring significant remedies.

A 4% RTF produces the same $40 million payment in both transactions—but the seller has not assumed the same risk.

In the second transaction, the target may spend a year operating under interim covenants, managing employee and customer uncertainty, foregoing other strategic alternatives, and living with the market overhang of an announced transaction, only to have the transaction fail.

Transaction value alone tells us very little about the appropriate allocation of that risk.

What should drive the number?

Transaction value remains an important reasonableness check. But several other considerations should inform the analysis.

• The nature and allocation of the closing risk. Consider whether the risk is financing, regulatory, or something else; whether the risk is created principally by the buyer, the target, or the combination of the two businesses; and which party can control or mitigate it.
• The duration of the exposure. A target tied up for 12 months assumes a different burden than one expecting to close in six weeks.
• The consequences of a failed deal. Employee retention, customer and supplier relationships, competitive positioning, foregone alternatives, and market perception can all make a failed transaction considerably more costly than the out-of-pocket costs incurred pursuing it.
• The buyer’s covenants. A substantial RTF does not necessarily compensate for a weak regulatory-efforts covenant. Conversely, an expansive hell-or-high-water obligation combined with a very large RTF may allocate the same regulatory risk to the buyer twice.
• The remedies package. Consider whether the seller can compel the buyer to close, whether specific performance is available only if the debt financing is funded, whether the seller can seek damages, and whether the RTF is the seller’s exclusive remedy.

A 5% RTF, which is the seller’s sole remedy (making it truly a buyer’s option), is economically very different from a 5% RTF sitting alongside meaningful specific performance rights.

Sometimes the buyer’s economics and motivations matter too

There is another consideration that a simple percentage-of-deal-value analysis misses.

Where an RTF is intended to reinforce a buyer’s obligation to pursue regulatory approval, its size should arguably be considered against the economics of the buyer’s decision not to close.

Consider what remedies the buyer might be required to offer regulators and the cost of those remedies; how valuable the expected synergies are; and the point at which paying the RTF becomes economically preferable to accepting a difficult regulatory remedy.

A fee can look substantial to a buyer as a percentage of target value while remaining relatively insignificant compared to the economic benefit of refusing the action necessary to obtain approval.

Further, as RTFs increase in popularity, insurers are also catching on. As our colleagues previously mentioned in an article from our Quarterly, a new insurance product—reverse termination fee insurance—has recently emerged for use in the US and Canada. Under this insurance, M&A parties can insure against the risk that a reverse termination fee becomes payable under an M&A agreement as a result of regulatory issues. This allows a buyer to transfer risk to an insurance provider, similar to R&W insurance policies; however, unlike R&W insurance policies (which are more prevalent in private M&A transactions), RTF insurance is applicable in both public and private M&A contexts.

While RTF insurance provides a financial backstop that may be attractive to a seller, especially in an auction process, it may also disincentivize a buyer to satisfy its regulatory efforts covenants.

That is why a RTF, an efforts covenant, any insurance, and any limitations on required remedies need to be negotiated together.

Symmetry isn’t necessarily the answer

There can also be an instinct to negotiate the RTF with reference to the target’s termination fee, and while sometimes the symmetry makes sense, sometimes it does not.

Recent Canadian transactions illustrate both approaches. In Cenovus’s acquisition of MEG Energy, the termination fee and regulatory RTF were both $242 million. In Mubadala Capital’s acquisition of CI Financial, the target termination fee was $150 million, while the buyer RTF was $225 million.

Recent Canadian studies suggest that symmetry is more prevalent based on certain triggers. A 2024 ABA study of Canadian public-target transactions suggests that an RTF for a buyer financing failure is higher than a general termination fee 86% of the time⁸, whereas in the context of an RTF for a general breach or failure to obtain regulatory approval, the RTF is often the same as the applicable termination fee.

Neither structure establishes a rule.

The relevant question is what each fee is protecting against. A target termination fee addressing a superior proposal and an RTF addressing prolonged regulatory risk do not need to be identical simply because they appear in the same agreement.

While symmetry may be a negotiating position, it isn’t necessarily a commercial principle.

Don’t forget the trigger

Finally, even a carefully calibrated RTF is only valuable if the agreement requires it to be paid.

The Alberta Court of Appeal’s decision in Chemtrade Electrochem Inc. v. Superior Plus Corporation, 2025 ABCA 31 (leave to appeal to the Supreme Court of Canada was denied in September 2025) is a useful Canadian reminder. The dispute involved a $25 million RTF if Canexus Corporation (subsequently acquired by Chemtrade Electrochem Inc.) and Superior Plus Corporation could not obtain all competition approvals for an acquisition by a certain date. The case turned on whether the contractual trigger for an RTF captured the regulatory failure that occurred. While the trial judge, based on the context of the negotiations surrounding the transaction, decided that it did, the Alberta Court of Appeal, based on an objective and plain reading of the contract, decided that it did not.

The lesson is straightforward: agreeing on the amount, trigger, efforts covenants, termination rights, and remedies provisions is only half the battle. Clear drafting is the other.

Start with the risk, not the percentage

Market data matters. A proposed RTF dramatically outside the range seen in comparable transactions deserves explanation, but precedent percentages should be a check on the analysis, not a substitute for it. Before asking what the RTF should be, ask:

• What risk are we allocating?
• Who controls it?
• How long will the seller bear it?
• What happens if it materializes?
• What other remedies does the seller have?

Then ask, “What’s market”?